Markets
SUN

Where Will Sunoco LP Get Growth From Here?

Image source: Sunoco LP investor presentation.

The most recent acquisition, which closed at the end of March, was more than $2.2 billion of Energy Transfer Partners' assets. This acquisition will probably stretch the company's balance sheet for a while, but the company expects to wind down capital spending after this acquisition and get back to a target debt range of a rather reasonable debt-to-EBITDA ratio of 4.0 to 4.5.

Another reason Sunoco might be backing away from the acquisition front for a bit is that Energy Transfer Partners is basically out of retail and marketing assets to drop down to Sunoco, and the company will now need to pivot to a new growth strategy.

Plenty of options

There are two things you need to consider with the retail and marketing aspect of the oil business: It's a very mature market, and it's very fragmented. Typically when you see a gas station, you see big name brands such as Exxon, Mobil, Chevron, or Shell. In reality, tough, most of these stations aren't actually owned by the Big Oil giants. Rather, they lease their name out to mom-and-pop organizations that may own only one or two stations. In fact, more than 70% of retail stations in the U.S. are operated by companies that own no more than 50 total locations.

Image Source: Sunoco LP investor presentation

Consider, too, that we've been using gasoline as our primary transportation fuel for more than a century now, and with more than 128,000 retail stations already in place across the country, overall growth for the industry will be very modest. For Sunoco to keep growing at a strong clip, it will need to take greater market share. Fortunately for Sunoco, this fragmented industry could be consolidated rather easily.

While there's ample opportunity here, the company's growth strategy would definitely change. Rather than growing with large, single transactions, the greater opportunity will lie in picking up new stores one at a time. This is a strategy that may not garner lots of headlines, but it does give the company some financial flexibility, since raising the funds for a few stations at a time is a lot easier than trying to get $2 billion all at once, as it did with its most recent purchase. In fact, smaller acquisitions could allow the company to grow through investing any excess distributable cash flow, making it less reliant on external sources of capital.

What a Fool believes

Investing in retail gas stations doesn't sound like the fastest-growing business approach, but the past year at Sunoco has been a big one for growth, having acquired all of Energy Transfer Partners' retail stations. Without it, though, the company will need to look elsewhere to find growth. After taking on such a large debt load from its recent dropdown, it wouldn't be surprising if the company elected to forgo large acquisitions and focus on improving the company's financial standing. Once growth is back on the menu, though, don't be surprised if Sunoco looks to start consolidating a very fragmented industry.

A secret billion-dollar stock opportunity

The world's biggest tech company forgot to show you something, but a few Wall Street analysts and the Fool didn't miss a beat: There's a small company that's powering their brand-new gadgets and the coming revolution in technology. And we think its stock price has nearly unlimited room to run for early in-the-know investors! To be one of them, just click here .

The article Where Will Sunoco LP Get Growth From Here? originally appeared on Fool.com.

Tyler Crowe has no position in any stocks mentioned. You can follow him at Fool.comor on Twitter @TylerCroweFool.The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days . We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy .

Copyright © 1995 - 2016 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

In This Story

SUN

Other Topics

Stocks

Latest Markets Videos

The Motley Fool

Founded in 1993 in Alexandria, VA., by brothers David and Tom Gardner, The Motley Fool is a multimedia financial-services company dedicated to building the world's greatest investment community. Reaching millions of people each month through its website, books, newspaper column, radio show, television appearances, and subscription newsletter services, The Motley Fool champions shareholder values and advocates tirelessly for the individual investor. The company's name was taken from Shakespeare, whose wise fools both instructed and amused, and could speak the truth to the king -- without getting their heads lopped off.

Learn More